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Pricing Policy: Time Customization. I. Economic and Behavioral Foundations of Pricing. II. Power Pricing Concepts. Outline. Time customization of prices: The short term Trial and accelerate purchase Potential demand buildup Peak and off-peak pricing

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pricing policy time customization
Pricing Policy:Time Customization
    • I. Economic and Behavioral
  • Foundations of Pricing
  • II. Power Pricing Concepts
outline
Outline
  • Time customization of prices: The short term
    • Trial and accelerate purchase
    • Potential demand buildup
    • Peak and off-peak pricing
    • Demand probing and yield management
    • Potential negative consequences
  • The long-term dynamic effects
examples
Examples
  • Campbell offered trade deals to retailers during summer (a eight-week period)
  • Introductory offer on a new product
  • Varying airfares over time
  • Early bird specials
  • Hotels’ winter specials
basic motivations
Basic Motivations

1. Trial

2. Purchase

Acceleration

Not Time

driven

Known

3. Potential Build-up

4. Peak Load

Time

driven

5. Peak Load withDemand Shift

Information

About Demand

6. Demand probing

Initially

Limited

7. Yield Management

1 trial and 2 purchase acceleration
1. Trial and 2. Purchase Acceleration
  • On Saturday, 11/22, 1986, Ho Camera offered 5 rolls of Fuji film (24 exposures) at $15.98 less a $10 manufacturer’s mail-in rebate valid until 12/21, 1986.
  • The offer highlighted Fuji’s $5.98 “Final Cost After Rebate” or $1.20 per roll – approximately 60% less than the regular price.
  • The vast majority of consumers have been loyal to Kodak even though Consumer Reports citing virtually indistinguishable quality differences in their films.
  • Two goals:
    • To persuade consumers to switch and try Fuji
    • To accelerate purchase and “load pantry”
1 trial and 2 purchase acceleration6
1. Trial and 2. Purchase Acceleration
  • Two other mechanisms for enacting price customization:
    • Coupon
    • On-shelf price cut
  • These mechanisms differ in two important respects:
    • Reference price
    • Selectivity (areas, price-sensitive consumers, and Kodak consumers)
coupon redemption
Coupon redemption
  • A panel-level study of how shoppers redeem coupon when they purchase consumer packaged goods
  • Regular users are more likely to redeem coupons than previous nonusers
  • What is the motivation behind coupon offers?
purchase acceleration vs forward buying
Purchase Acceleration vs. Forward Buying

Shipments

Consumption

DEC

MAR

JUN

SEP

How do you resolve this problem?

edlp versus hilo stores
EDLP versus HILO Stores
  • An examination of 3,000 common SKUs across 5 supermarkets (2 EDLPs and 3 HILO stores) (Ho, Tang, Bell, Management Science, 1998)
  • HILO stores have a higher price variance and a higher expected price
  • EDLP versus HILO stores
    • Number of trips
    • Average spending per trip
mean and standard deviation of basket prices
Mean and Standard Deviation of Basket Prices

Tang, Bell, and Ho (California Management Review, 2002)

3 potential buildup of low wtp customers

Price

$60

$40

Time

1

4

5

6

2

3

3. Potential Buildup of Low-WTP Customers
  • Mr. Coffee coffee maker (unit variable cost = $32)
  • The goal is to charge maximum WTP of a growing proportion of the market that would buy at regular price
  • Suppose customers for a coffee maker are of two types, one valuing the product at $60 and the other at $40.
  • Each group has a “birth” rate of 100 per month
4 peak and off peak load pricing
4. Peak and Off-PeakLoad Pricing

Peak

Sales

Volume

Sales

Volume

Off-Peak

100

75

50

37.5

$100

$50

$75

$50

$100

$150

5 peak load with demand shifts
5. Peak Load with Demand Shifts
  • If we charge $600 for both day flight and redeye, we receive $120,000 (leading to zero demand for redeye)
  • If we charge $1000 for day flight and $400 for redeye, we receive $140,000 (shifting the students’ demand to the redeye)
uncertain demand
Uncertain Demand
  • Consider selling a product to a single customer and three scenarios on information about a potential customer’s valuation of a product
    • You know she values the product at $5
    • You know she values it somewhere between $4.00 and $6.00
    • You know she values it somewhere between $0 and 10.00 (each value is equally likely)
  • Note the customer’s expected valuation is $5.00
optimal price variable cost 0
Optimal Price (Variable Cost = 0)

1.0

1.0

Prob.

of a Sale

Prob.

of a Sale

X

Y

$4

$5

$6

$10

$5

optimal two day sale pricing
Optimal Two-day Sale Pricing

Unit variable cost =0

1.0

1.0

Prob.

of a Sale

X

Prob.

of a Sale

Y

$10

$10

$5

$3.33

Day 2

$6.67

Day 1

Charge $6.67 in Day 1 and $3.33 in Day 2

Expected Revenue = 1/3 (6.67) + 1/3 (3.33)

7 yield management
7. Yield Management
  • American Airlines pioneered the concept in the late 1970s
  • Leisure: Book well in advance, price oriented, and flexible on schedule
  • Business: Book on short notice, less price sensitive, and inflexible on schedule
  • Yield management system is to price and manage the availability of specific fare types over time as demand for a particular flight reveals itself
  • If bookings are above the norm, this is a signal to shut off availability of highly discounted fares
airline ym operations

inquiry

transaction

data

Reservation

System

availability

display

YM System

- forecasting

- allocation

implemented

allocations

Point of sale

forecasts

recommended allocations

bid price

YM Analyst

- limited domain (O-D pair)

- revenue performance incentive

Airline YM Operations
basic ideas chicago sfo
Basic Ideas: Chicago  SFO
  • Based on initial forecasts, start with initial allocations (number of seats) for the two fare classes.
  • Adjust the allocations based on demand realizations.
  • For example, if the demand for Full Coach looks promising, “close” the allocation for Discount.
  • If later the demand is lower than expected, move allocations to Discount again.
examples what motivations
Examples: What motivations?
  • Campbell offered trade deals to retailers during summer (a eight-week period)
  • Introductory offer on a new product
  • Varying airfares over time
  • Early bird specials
  • Hotels’ winter specials
potential negative consequences
Potential Negative Consequences
  • Incremental or substitute sale (e.g., negligible increase in consumption)
  • Cost of customization (e.g., production and inventory costs)
  • System effect
    • Reference price effect
    • Wait for sale mentality
    • Fairness
long term dynamic effects
Long Term Dynamic Effects

Current

Period Price

Price Response Curve

Competitive

Situation

Current

Sales Volume

Current

Contribution

Current

Cost

Future Price

Response Curve

and Price/Profit

Realization

Future Cost

Position

punch line
Punch-line
  • Clearly understand the underlying motivation
  • Design the time-customization plan based on the motivation
  • Consider the potential negative consequences and long-term dynamic effects
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